More good press for Ozzie from Bizweek (see bold last Paragraph)SEE NO EVIL. Regulators do not always act so swiftly, or at all. For example, in 1992 and 1993 the NASD became aware of possible payoffs to a 150-broker California firm called LaJolla Capital. According to an internal NASD memorandum obtained by BUSINESS WEEK, NASD examinations found that the brokerage had accepted ''due diligence fees'' and ''investment banking fees'' from companies for which it was a market
maker.
But the NASD never acted on those findings--which officials suspected wereillegal payoffs. A LaJolla spokesperson, Janet Frazier, denied LaJolla had ever accepted payments for making a market in companies, but said the company continued to accept due diligence fees--in return for carrying out due diligence on companies.
The NASD's Goldsmith says that he does not know why the LaJolla case was not pursued. But he observed that a federal appellate court ruling in 1994--on alleged payoffs to another firm--required the NASD to issue a formal rule banning such conduct before prosecuting payoffs to brokerages. The rule was not issued until last July. In the
interim, he noted, the NASD did not pursue such cases. Goldsmith pointed out that the NASD fined LaJolla in September for violating penny-stock sales rules, in a decision that LaJolla says it is vigorously contesting. However, the recent action makes no mention of payments from companies.
Payoffs to brokers and brokerages by corporate officials and stock promoters are some
of the most invidious practices in the chop-stock business. How widespread are they?
Regulators at the NASD minimize their prevalence. ''When you're talking about
payments or bribes--we take that very seriously. But to characterize that as widespread,
as sort of the practice or the norm, or as endemic, even to the small, micro-cap
stocks--we just don't see that,'' says the NASD's Goldsmith.
But former chop-house execs maintain that such payoffs are pervasive throughout the
world of micro-cap stocks. Chop-house brokers say that corporate officials, directly or
through intermediaries, frequently pay off brokers to drive share prices upward, or to
obtain offerings of their shares for listing on the OTC Bulletin Board. At one brokerage,
a former chop-house manager maintains, every OTC Bulletin Board stock offering
involved a payoff. ''It's a very thin market, usually there's very little on the buy side
initially--that's why they have to enlist the help of a lot of brokers to get the buyers for
these things,'' says one former chop-house broker. The brokers have the whip
hand--and thus can demand payoffs. In one case, according to the former chop-house
official interviewed by BUSINESS WEEK, even NASD examiners are not immune
from accepting payoffs. However, NASD officials contend that they have heard no such
allegations--which, they say, they would promptly refer to law enforcement.
One problem the NASD does pursue fairly vigorously is common at chop
houses--excessive commissions and markups. But the cases they handle appear to be
the tip of the iceberg--and point up the sensitive role served by the Wall Street firms that
process trades for chop houses. The firms often process trades that appear to show
excess markups and commissions--but insist that they are in no position to monitor the
activities of the firms that trade for them. Regulators are studying ways of chipping away
at this long-established, legally sanctioned ''see no evil'' policy--for often, there is a lot of
evil that passes through their trading systems.
A LOT OF HEAT. In its recent prosecution of Euro-Atlantic, markups of as much as
63% were alleged. The NASD complaint does not specify when the trades took place,
but they appear to have been in the latter half of 1996--at a time when the trades were
processed by Schroder Wertheim. A Schroder spokeswoman declined comment on
whether the firm was aware of the overcharges or even whether Schroder processed
the trades--though the spokeswoman said the firm ''apparently'' did so.
One firm that has been subject to substantial heat for its chop-house clearing
activities--particularly at the now-defunct A.R. Baron--is Bear Stearns. Bear has been
the clearing agent for a host of chop houses, including PCM Securities, Meyers Pollock,
and another major dealer in small-company stocks--Paragon Capital--where, regulators
have been told by a former Paragon employee, massive overcharges have taken place.
These charges are significant because Paragon is believed to be one of the largest
dealers, possibly the biggest, in OTC Bulletin Board stocks.
Internal Paragon trading records from late 1994, which were recently submitted to the
NASD and were obtained by BUSINESS WEEK, show apparently massive
commissions. Some were as high as 25% or more. One trade went as follows: On Aug.
19, 1994, one customer bought 17,700 shares of Environmental Technologies USA
Inc. for $13,275. According to the trading records furnished to the NASD, as shown
above, he paid a commission of $3,982.50--30%. Similar high commissions were
charged for trades that took place on other days that month.
According to the trading records supplied to the SEC by a former Paragon employee,
customers were similarly overcharged in a host of other stocks--Evro, Paramark
Enterprises, Apogee Robotics, La-Man, Eco2, First Standard Ventures, and quite a
few others. There was no indication that the firms had any knowledge of the
overcharges. Repeated calls to Paragon President Danny Levine for comment on these
allegations were not returned.
The trading records were routinely churned out by Bear Stearns, which could have
noted the size of the commissions at Paragon by making a simple calculation. Two
former Paragon officials, who were unacquainted with the former Paragon employee
who submitted the records to the NASD, said that the trading records show the
magnitude of the commissions clearly and that they would be obvious at a glance.
However, an official of a rival clearing firm--no friend of Bear--notes that there is ''no
obligation of a clearing firm to look at anything like that.'' Bear Stearns's position is that
it simply processed the Paragon trading records and did not review them. Asserts Bear
Stearns's general counsel, Mark E. Lehman: ''It is our view that the responsibility for
determining markups and commissions is that of the introducing firm and not the clearing
firm.'' According to Lehman, Bear Stearns is still clearing trades for Paragon.
''GRAVY.'' One former Paragon manager observed a nefarious practice that, he
maintains, has been common at the New York headquarters of Paragon in recent years.
According to this ex-manager, who personally witnessed the practice, Paragon would
postdate and predate time stamps of trading tickets, to make markups as large as
possible. According to this ex-manager, the scheme worked like this: A customer would
buy 10,000 shares of a Bulletin Board stock when the market was $5 bid and $6
asked. If portions of the order were filled at a lower price, the order was supposed to
be time-stamped to reflect that, and at the end of the day the orders are submitted to
NASDAQ. The former manager maintains that Paragon would accumulate the stock
during the day--paying, say, $5 for the first thousand, $5.50 for the next, and so
on--and show the entire order at the highest price. ''Everything else is gravy for the
broker,'' says the ex-Paragon manager.
No one seems to have sopped up the gravy that flows from chop stocks more than
Jordan Belfort, who founded the Stratton Oakmont penny-stock brokerage in the
1980s. Just 35, he is believed to be a millionaire many times over. ''Investment banker''
was how Yachting Magazine characterized him in its May issue, in detailing the sinking
of his 150-foot yacht, the Nadine. A publicity release from United Film Distributors, one
of Belfort's many enterprises, calls him a ''private investor.'' The Queens (N.Y.) native is
the executive producer of several of United's movies, which have titles such as Santa
With Muscles.
But there is another side to Belfort. According to numerous chop-house execs and
traders interviewed by BUSINESS WEEK, Belfort has remained a hidden power
whose influence in the chop-stock world has hardly waned since he sold his stake in
Stratton and was barred for life from the securities industry by the SEC, nearly four
years ago. (Belfort agreed to the ban without admitting or denying the SEC's allegations
of securities fraud.) He has managed to retain his power and wealth while apparently
remaining within the letter of his agreement with the SEC. Indeed, his name does not
appear on a single scrap of paper associated with any brokerage--except Stratton.
After he left Stratton, Belfort continued to draw vast sums from the firm--something that
is currently being investigated by Stratton's bankruptcy trustee, Harvey Miller. Under a
''noncompete'' agreement that he signed with Stratton in March, 1994, Stratton agreed
to pay Belfort a staggering $180 million, payable in monthly installments of $1 million. In
return, Belfort could not open a competing brokerage. The timing of the deal was
fortuitous, to say the least--it was signed one week before Belfort was banned from the
securities business. The SEC ban, one state regulator observes, was no doubt pending
at the time the noncompete was signed. Belfort and the former attorney for Stratton who
negotiated the deal, Ira L. Sorkin, declined comment, with Sorkin citing attorney-client
privilege.
Belfort kept up his side of the bargain by keeping out of the securities business--at least
on paper. Sources on Wall Street assert that Belfort continues to exert control, through
intermediaries, of some of the leading brokerages in the micro-cap stock business.
Among them are D.L. Cromwell Investments, Monroe Parker Securities, and Biltmore
Securities. Allegations of Belfort control are not new for Monroe Parker--they were
raised in 1992 by the NASD when the firm applied for membership, notes Monroe
Parker attorney Bill Singer. But Singer says that the NASD was satisfied that Belfort
had no hidden role at the firm. Attorneys for Biltmore and D.L. Cromwell deny that
Belfort has any tie to the firms.
FRONT MAN. But Amr ''Tony'' Elgindy, head of a Fort Worth-based firm called Key
West Securities Inc., has alleged in court papers that Belfort bought a silent partnership
in his firm early in 1997. He maintains that the relationship fell apart after he resisted
pressure by Belfort to open up an office in New York City to sell stock to the public in
the time-proven way, by high-pressure cold-calling. According to Elgindy, Belfort
bought into his firm using a trusted associate named Robert LoRusso as a ''front man.''
LoRusso and Belfort vigorously deny Elgindy's allegations.
LoRusso and Belfort both maintain that Elgindy is no angel. Indeed, in September,
Elgindy settled NASD charges of alleged trading abuses by consenting to a fine and a
one-year ban as principal of a brokerage firm. He neither admitted nor denied the
charges. The NASD complaint alleges that ''Elgindy was suffering from severe mental
illness'' at the time of the trading abuses. Elgindy maintains that was a reference to
severe depression. LoRusso also asserts that Elgindy misappropriated funds and failed
to disclose regulatory problems, which resulted in a suit by LoRusso to rescind his deal
to buy into the firm. LoRusso's allegations are denied by Elgindy, who settled the suit by
agreeing to rescind the deal.
PASSIVE? Although Elgindy is anything but an unbiased observer, his allegations
support the assertion of chop-house brokers and traders that Belfort remains a powerful
presence in the chop-stock business. According to Elgindy, Belfort is a well-capitalized
short-seller of chop stocks--an adventurous brand of trading that is Elgindy's specialty.
But, say Elgindy and other sources familiar with Belfort's activities, Belfort also has had
access to cheap stock in numerous companies and has pushed a host of stocks through
retail firms-- particularly Monroe Parker, D.L. Cromwell, and Biltmore. In a phone
conversation with Elgindy in December, 1996, that Elgindy taped, Belfort seems to
imply that he is more than just a passive observer of activities on the Street. Referring to
one stock deal, Belfort told Elgindy: ''I have access to a lot of small firms.''
Elgindy and others familiar with Belfort's activities maintain that Belfort has been a
hidden power behind the retailing of a host of stocks. Among the stocks that Elgindy
says were Belfort favorites were Big City Bagels, Luma Net, Grand Havana
Enterprises, and the company that was the subject of the possible Paragon
overcharge--Environmental Technologies. Elgindy says Belfort would sometimes supply
brokers with cheap stock in the firms, which would be sold to customers at huge
markups. Belfort says he legitimately owns shares in some of those companies but
denies having access to ''cheap stock'' in any. The chief executive of Grand Havana,
Harry Shuster, says that he knows of no Belfort involvement in the company for the past
two years. Officials of the other companies did not return phone calls.
STARTLING REVELATION. Elgindy maintains that Belfort sometimes would wax
sentimental about the good old days at Stratton. And taped excerpts of those
conversations, which Elgindy shared with BUSINESS WEEK, are revealing. In one
conversation in December, 1996, Belfort speculated why one particular stock both men
were shorting was doing so well. ''They're paying people off,'' said Belfort. ''They're
definitely paying people off with stock. I know. I owned a very large OTC firm.... I
made a zillion dollars off my deals.''
In another taped conversation, Belfort made a startling disclosure. According to
Belfort's taped account, a company called Builders Warehouse Association Inc.--which
since has become a unit of Osicom Technologies Inc.--once offered him a huge bribe in
return for Stratton selling the stock. Said Belfort: ''This guy came to me, this...kid from
Utah came to me....He offered me three shares in Switzerland for every share I sold....I
had like 500 brokers,'' Belfort continued. ''I could have sold a zillion shares.'' Belfort
declined to discuss the alleged bribe offer. Osicom and Barry Witz, former chief
executive of Builders Warehouse, did not respond to requests for comment.
Whether Elgindy is a whistle-blower or a sore loser, one thing is sure: The conduct that
he describes is common in the world of chop stocks. In their efforts to clean up the
world of micro-cap stocks, the regulators have always seemed to be a day late and a
dollar short--or perhaps more accurately, years late and billions of dollars short. Their
efforts to crush micro-cap fraud are well-intentioned, sometimes vigorous--but they
have failed to put more than a dent in the problem. Driving brokers out of the industry
does little good when they stay active behind the scenes. Shutting firms does little good
when other firms open to take their place. The money is simply too good: The
indictment on Nov. 25, which alleges the involvement of four ranking Mob figures in
pushing a single chop stock, proves that. And it is coming from a seemingly bottomless
pit--the pockets of small investors.
BY GARY WEISS"
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